Firstly, let me say that I would never be without a trust. I do not believe in winding up a trust, even in light of the new trustee act, which requires additional disclosures and transparency to beneficiaries. Life, especially in the business world, has become increasingly litigious, making creditor protection a paramount concern. Forming new relationships can be risky, as breakups after short periods of time can lead to devastating outcomes. Moreover, there is a growing push for the introduction of various forms of wealth taxation, including asset value taxes, land taxes, or even a return to death duties.
I’m not willing to rely on the chance of a sympathetic government being in power at the time of my death, whenever that may occur. So, for me, my trust stays. It remains an essential part of my financial planning. It offers the best means to manage my affairs and transition my assets to my children and grandchildren under sound governance and stewardship.
While one could argue that achieving this through a will is possible, I prefer to avoid the possibility of disputes over my wishes and want to maximize the protections I can obtain in the meantime.
However, a crucial question remains: can a trust still provide tax advantages, given that the government is set to increase the trust tax rate to 39% from April 1st, placing it on par with the top personal tax bracket for individuals earning over $180,000?
The answer to this question comes down to your specific family circumstances and how you choose to manage and utilize your trust. If your trust generates income, the trustees face a decision: they can retain that income within the trust, subjecting it to the 39% tax rate. Alternatively, they can distribute the income to beneficiaries of age who might be subject to lower tax rates than the 39% applied to the trust.
However, it’s important not to be solely driven by the desire to save on taxes. When making an income distribution to a beneficiary, you must be ready to pay it to them. They have the right to know that they are beneficiaries, be informed of the distribution, and, of course, receive the funds. This is where good governance, fairness, and guidance from your trustees come into play.
When trustees decide to distribute income to beneficiaries, they must consider all beneficiaries fairly. While trusts are often established to safeguard a settlor’s assets, they also serve the purpose of benefiting the trust’s beneficiaries, presenting an opportunity.
As your children and grandchildren grow, their financial needs increase. Expenses such as a first car, private school education, university costs, or a down payment on their first home will undoubtedly arise. This presents an opportunity for the trust to make payments that benefit the beneficiaries and contribute to their personal growth and betterment. When the trust is used for these purposes, the payments should be accurately accounted for against the beneficiary who received the benefit. In doing so, these payments can offset any future income or capital distributions that the trustees might make.
With effective management, this approach avoids situations where a trust might accumulate debt to a beneficiary when making an income distribution to them that incurs a lower tax rate.
So, looking for tax-efficient ways to distribute income to your beneficiaries and circumvent the 39% trust tax rate is a smart way to maximize the advantages of your trust for your broader family. Combining this strategy with strong governance from your trustees and sound accounting practices ensures fairness and fully harnesses the benefits your trust can provide in 2024.